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Tuesday, March 03, 2015

Boosting growth through better foundation skills

by Andreas SchleicherDirector, Directorate for Education and Skills

The links between income inequality and economic growth are fairly well established: If income inequality becomes too high, large numbers of people no longer have the means to participate in the economy and economic growth suffers, nor will people be able to invest in their skills to climb up the social ladder. If income inequality is too low, no one goes to work and growth suffers too. A conventional way to move between these two undesirables is to redistribute income, e.g. through taxes. But wouldn't it be much smarter if, instead of dealing with the consequences of income inequality, we could address the root of the problem and moderate the sources of income inequality? Then things would not be a zero-sum game but everyone would win.

One such source of inequality in wages is inequality in the skills of people. Our parents told us that we should study hard to get a good job and a decent salary. And that wisdom has never been more true than today. As you can track with our annual publication, Education at a Glance, the highly educated never had better life chances than they enjoy today, while those without baseline qualifications have never faced a greater risk of social and economic exclusion than today. And the rapid rise in knowledge workers in advanced economies has not led to a decline in their pay, which is what happened at the low end of the skills distribution.

Data from OECD’s Survey of Adult Skills, which measures not just the formal qualifications people have attained, but also what they actually know and can do, allow us now to study this in new ways. An OECD Working Paper has just done that and found several things. If all adults were simply to complete an additional year of education (which no doubt would be good for each of them, as well as for the overall economic and social well-being of their country) top earners would actually benefit much more than those with lower wages. So wage inequality would rise. The red line in the chart above shows the increase in wages if people would increase the length of their education by one standard deviation for each part of the wage distribution. Essentially, it shows that the more people earn, the more further improvements in their education boosts their earnings. The data* also show that the financial returns to tertiary education would increase more steeply at the top end of the wage scale, while returns to secondary education would actually decline. This may be because higher education is where individuals acquire the specialised knowledge and skills that are more highly rewarded in the labour market. Another explanation is that technological advances mainly benefit the most skilled individuals, boosting their earnings most. In a nutshell, raising overall levels of educational attainment alone could actually increase the wage gap.

There is another angle to this. The data also show that countries were people are more highly skilled, on average, are also those where skills proficiency is spread more evenly across the population*. So better and more equitable skills actually go together.

The most worrisome finding from the paper is that countries with greater inequality in skills are also those where parents’ education has a stronger impact on their children’s skills**. In other words, where skills are less evenly distributed in the population, young adults are less likely to attain better skills than their parents – and thus inequality in both skills and wages become more firmly entrenched

But the data also show that ensuring that more people acquire essential foundation skills, whatever their skills or formal qualifications, can be an effective way to lead to a more equitable increase in earnings. This is shown by the blue dotted line in the chart above. So increasing investment in foundation skills – by raising the quality of basic education across the board – would not only result in higher productivity and greater employability among adults, but would also ensure that the benefits of economic growth are more equally shared across the population.

* Figure 2, page 10 of the OECD Working Paper "Skills and wage inequality: Evidence from PIAAC"** Figure 3, page 11 of the OECD Working Paper "Skills and wage inequality: Evidence from PIAAC"